Cash vs Profit

Tuesday afternoon at the desk. Two Q4 results land in the same hour. Two midcap industrials. Both print Net Profit of Rs 245 cr. Both press releases say "record quarter". Both stocks open green the next day.

Then you open the cash flow page on each.

Company A collected Rs 220 cr of real bank deposits against that Rs 245 cr Net Profit. Cash conversion ratio 0.90. Working capital steady. Receivables in line with sales. Earnings showed up in the bank. Boring. Clean. The kind of quarter you can compound.

Company B collected Rs 38 cr against the same Rs 245 cr Net Profit. Cash conversion 0.16. Receivables blew out by 92 days. Inventory pile up across two warehouses. The profit is on the slide. The cash is on the customer's terms. Same income statement headline. Two completely different businesses.

Net Profit is what management chose to recognise. Cash From Operations is what arrived in the bank. The gap between them, what accountants call accruals, is the only line item that does not negotiate.

Sloan put a number on this in 1996. Sorted US listed companies into deciles by total accruals (Net Profit minus Cash From Operations). Bought the lowest decile. Shorted the highest. Earned roughly 10.4 percentage points per year of abnormal return through to 1991. Replicated globally inside the Quality Minus Junk factor framework (Asness Frazzini Pedersen 2019).

Three zones to file. Above 0.80 over three quarters is healthy. 0.50 to 0.80 is the watch shelf. Below 0.50 for three quarters running is a cliff, not a slowdown, because by the time the auditor flags it the multiple has already compressed twice.

Two reports. Same quarter. One is a paragraph. The other is the verdict